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Greece & Germany: Things tend to get worse before they get more worse

The young man stood up.
“Mrs. Bylaxis came in this morning,” he said. “She said the proverb you did for her last week has stopped working.”
Didactylos scratched his head.
“Which one was that?” he said.
“You gave her `It’s always darkest before dawn.’ ”
“Nothing wrong with that. Damn good philosophy.”
“She said she didn’t feel any better. Anyway, she said she’d stayed up all night because of her bad leg and it was actually quite light just before dawn, so it wasn’t true. And her leg still dropped off. So I gave her part exchange on `Still, it does you good to laugh.’ ”

Terry Pratchett – Small Gods

Noah points out that there’s an oft overlooked argument in favour of austerity. It’s a stupid argument, but that doesn’t mean we shouldn’t take it seriously. The argument runs that stimulus will work but that is bad because it will delay “necessary” reform. This idea has a long heritage and it’s always been a good idea to mock it. I’ll try to provide some constructive examples against it.

First of all, let me say, I am a dedicated can kicker. Karl Smith is right, do you realise that everyone you know someday will die? The future is uncertain so simply making a bad thing happen later is valuable because we might not be here. Problems also sometimes solve themselves and erstwhile solutions become problems. Pretending to have the foresight necessary to say “you now must suffer now so that they then do not” is insulting.

I also think the idea is bad on its own terms. Crap policy begets crap policy for a number of reasons. Most mundanely I’d posit there a correlation between following good short-term and good long-term policy. If a government is adopting crippling austerity now, it is more likely not less that they’ll be adopting bad long term policies.

Most of all I think this “butter tomorrow, sawdust today” policy has been tried before and sown disaster. Here are a few examples:

Hayek thought the depression would force down wages by brute force and trigger the end of unionised workers. He thus resisted efforts to end it. The result? Starvation! Smoot-Hawley! Nazis! Bet he felt pretty silly about that one.

He’s in good company. Lenin in the 1900s argued that mitigation of the worker’s condition would delay the inevitable revolution and that nothing should be done to mitigate it. He actually got that one right. This time it was the Tsarist industrialists who must have felt silly (as much as dead people feel silly).

The little depression seriously derailed efforts to tackle climate change. Short-term suffering crowds out the long-term thinking needed to make policy effectively. Extending austerity makes it harder to talk about long-term sensible sacrifices because you’ve less to sacrifice.

As Ben Friedman argues “History suggests that, in the past, a rising standard of living has promoted tolerance for others, commitment to economic opportunity, and democracy. But stagnating incomes due to inequality can lead to the opposite outcomes.” Suffering makes people worse human beings and worse human beings make worse long-term policy.

To underline my point: the worst case scenario is Nazis. It is such a bad idea you can legitimately say “no because Nazi.” I can think of at least one apposite positive counterexamples too, also from Germany.

Via Scott, the German labour market reforms of the mid-2000s took place against the more benign global and domestic macroeconomic circumstances imaginable, the great moderation was in full flow. The reforms were so successful that German unemployment continued to sink lower even as Europe was mired in depression.

Coincidentally, just as Noah laid out the argument hypothetically, Steven Pearlstein comes along and positively endorses it. Only austerity and suffering can save Greece apparently. By embracing short term suffering interest-groups can be defeated and illogical and burdensome regulations can be removed. Only brave short-term sacrifice can engender long term growth.

So how is Steven’s strategy paying off? Yep, same as last time, fucking Nazis again:

First of all a defense. Greece is one of the few countries which spent the late 20th century moving from a middle-income to a high-income country. A round of applause please before you lecture them. Their politics and economy are dysfunctional and that will make them poorer, but it doesn’t need them to be in a depression. Being poor is bad, but being unemployed is evil.

Of course if unemployment is an evil, using unemployment as a punishment for being poorer than optimal is really evil. If the Greek economy is dysfunctional they should have higher inflation and lower real incomes, what they shouldn’t have to suffer is a manufactured unemployment crisis. It’s not just stupid and evil it’s perverse.

It is a bad idea that policy should be actively destructive in the short-term to act as a bargaining tool or cudgel to implement a certain pet policy. Suffering is bad, it makes us worse people and worse people make worse policy. If your leg does fall off, laughing probably isn’t the worst thing you could do, you could listen to these bozos.

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Edit: Matt Yglesias makes similar arguments, positively citing Mario Monti’s reforms which were scuppered because they didn’t stop Italy being in a depression.